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Goldman Sachs Charged With Fraud: Who Could Have Guessed? Part III

Goldman Sachs Charged With Fraud: Who Could Have Guessed? Part III The firm’s history suggests its vulnerability in periods of negative social mood. April 23, 2010

By Elliott Wave International

In the November 2009 issue of Elliott Wave International’s monthly Elliott Wave Financial Forecast, co-editors Steven Hochberg and Peter Kendall published a careful study of Goldman Sachs history — and made a sobering forecast for its future.

With the market’s downtrend recently in abeyance, these transgressions failed to capture the imagination of the public or the scrutiny of law enforcement. But the extreme recriminatory power of the next leg down in social mood suggests that Goldman’s dealings will become a lighting rod for public discontent.

In January 2008, Elliott Wave Financial Forecast noted that Goldman’s success relative to the rest of Wall Street pointed “to the eventual appearance of a much larger public relations problem in the future. In the negative-mood times that accompany bear markets, conflict of interest charges will come pouring out.” The recent revelations about Paulson’s and Friedman’s actions are exactly that to which we were referring. Additional claims against Goldman — including front-running its clients and profiting from inside information — are already too numerous to mention. As the bear market intensifies, the firm will attract scrutiny as easily as it brushed it off in the mid-2000s.

Based strictly on the form of its advance, a July 2007 issue of The Short Term Update called for a peak in Goldman shares at $234. Goldman managed one more new high to $250 in October 2007; it then fell 81 percent to a low of $47 in November 2008. The stock market’s wave 2 rise brought Goldman back to $193 on October 14. Its affinity for marching in lock-step with the DJIA strongly suggests that Goldman will decline to below its November 2008 low.

Another key socionomic trait is for the most successful recipients of bull-market goodwill to be singled out for special treatment in the ensuing decline. Even fellow financiers are taking aim. In a not-so-veiled reference to Goldman, one Wall Street titan said that big profits made by investment banks are “hidden gifts” from the state, and resentment of such firms is “justified.” Let the bloodletting begin.

Let the Buyers (of Stock) Beware
Goldman’s heavy involvement in the hedge fund industry is another bull market asset that will become a huge liability in the next wave lower. In January, when some minor insider trading charges were brought forward, Elliott Wave Financial Forecast stated that they were only a first puff of “what promises to be a huge mushroom cloud.” The next much larger puff, and its ability to quickly envelop the financial markets, was put on display as the hedge fund Galleon Group went from insider trading charges to complete liquidation in a matter of days. The headlines are already pointing to a potential chain-reaction: “Galleon Wiretaps Rattle Funds as Insider Trading Targeted.” Reports indicate that the Galleon investigation actually began in November 2007, one month after the start of Cycle wave c.

Back in 2007 when Elliott Wave Financial Forecast talked about the “conspicuously tight knit” nature of hedge fund participants, we added that in bear market times, these “men will turn on each other out of a need to survive.” According to reports, that is exactly what happened. The central witness “who brought down the hedge fund” suffers from “financial woes” and “is working with law enforcement in hopes of receiving a lighter sentence.” The bear market is already squeezing the most aggressive bulls from every angle. New legislative and administrative initiatives are being proposed, and in some cases enacted, that will reduce executive pay at bailed-out financial institutions by up to 90% and attempt to shift the cost of bailouts from taxpayers to other large financial companies. The most far reaching “reforms” probably won’t take effect until later, when the decline is over or nearly so.

Finance led the way down in 2007; so we shouldn’t be surprised by its apparent willingness to do so again. … This time however, the decline will be a third wave at Primary degree, which should be far more intense than the initial Primary-degree decline from October 2007 to March 2009. Stay tuned.

This article was syndicated by Elliott Wave International. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.